Multiplication by Division.

[qaz]

I've recently been reading McNugget's (Steve McKnight) "$1,000,000 in Property in One Year" book. In it he talks about a strategy called "Multiplication by Division". The idea is that he basically buys a house just before the wave of the boom goes through. He then sells it as the wave goes by and sells it and buys 2 houses in its place further down that the wave hasn't yet arrived at. Certainly an interesting strategy...........

He's some pros and cons I think you could place on this strategy. Please add to them.........

Pros:

Get to where the growth is about to start more often ("following the wave")
Diversify quicker by getting 2 houses instead of one (lessens vacancy risk)


Cons:

CGT which if on a high income can be a killer
Closing costs such as stamp duty need to be paid more often than otherwise


It certainly gave me another perspective than the typical "buy, hold and borrow against for another one" strategy. Opinions anyone?

 

[Peter Parker]

I've recently been reading McNugget's (Steve McKnight) "$1,000,000 in Property in One Year" book. In it he talks about a strategy called "Multiplication by Division". The idea is that he basically buys a house just before the wave of the boom goes through. He then sells it as the wave goes by and sells it and buys 2 houses in its place further down that the wave hasn't yet arrived at. Certainly an interesting strategy...........

This assumes that there *will* be a boom in the cheap areas that you've bought in. And that cheap areas considered poor quality will inevitably reverse their fortunes and 'catch up' to places that have already appreciated.

If this isn't the case, all you've done is gone from (say) 3 good quality IPs to 6 mediocre IPs, then to 12 dumps. Or you could be selling in bigger towns and buying in smaller and smaller towns where risks can be greater if you haven't done your research.

This theory also requires you to time markets and gives rise to the risk of you selling too early (exacerbated by the area you've bought into failing to perform as expected).

An alternative is a long-term buy and hold strategy of having a diversity of properties. You might still buy cheap country IPs but not necessarily after selling up your city and coastal IPs. You'd buy city when sentiment (and prices) are stagnant (and yields are reasonable) and buy country when the city markets are too hot and yields are miserable. Then you'll hopefully end up with a mix of both types of property, sufficient yield to service the portfolio, and enough growth to make it all worthwhile.

What Peter Spann calls 'leapfrogging' is just a fancy term for using equity increases to put down deposits for more properties, not having 'lazy' equity and maintaining leverage ratios. Unlike McKnight you rarely sell but your total debt may be higher and your cashflow lower. This is compatible with the alternative (above) but does not prescribe the purchase of country properties; other means to get cashflow are advocated instead.

Both approaches would have worked well during the recent boom. But of the two, the second to me sounds more sensible and less risky, even though it could limit the number of properties that can be purchased.

Regards, Peter

 

[GoAnna!]

There is no real reason why "multiplication by division" can't work in capital cities. Usually during a boom the growth "wave" moves from capital city to capital city, inner to outer and also from medium priced properties to lower. So it would be possible and I think advantageous to practice this in larger markets than just rural towns.

The emphasis would not necessarily need to be on cash flow but could be on purely capital gain with no intention of holding most of the properties by the end of the cycle. Instead you would hold a smaller number of properties with a very low LVR and hence create cash flow that way.

 

[likewow]

I think theres a few reasons this strategy isnt as good as it sounds:

How do you know there is going to be a 'boom' before the fact. Just because we've just had a big one doesnt mean there will be another similar one.

Aint hindsight great. Its easy to write this stuff after the fact, not so easy before. Unless your crystal ball is in good order.

The transaction costs and CGT will kill you.

Like everything with these property gurus, It sounds great in theory but wouldnt really be effective in practice.

 

[Rolf Schaefer]

You have to be very careful when trying to blindly follow advise from so-called property gurus.

You have to lift the veil and analyse how they have made their money (some did extensive wrapping and flipping), and in a property boom that is a fantastic strategy that creates great returns with little risk.

However, the same strategy, in a flat or decreasing market can be catastrophic.

So, as for many things in life, do your due dilligence with your eyes wide open.

We all have different strategies to accumulate wealth and no one strategy is the "RIGHT" one.

 

[geoffw]

Steve has not been around for a full cycle- it's much easier to make good money during a boom. Even I have done well in a boom.

Jan Somers and Peter Spann have been around in down times as well as up.

 

[WillG]

So it's as simple as 'he basically buys a house just before the wave of the boom goes through'.

Great in theory but you need to first recognise you are 'just before the wave of the boom', secondly 'have the finances to buy at that time' and thirdly 'take action'.

How may times in your life would a 'wave - boom' cycle repeat itself ? I suggest 2 or maybe 3 times during your working life (your working life is when you will have the greatest chance of affording property).

Assuming you do recognise the 'beginning of the wave', how can you be sure to have enough knowledge & finances in order to capitalise on it ?

Well, I managed to jump the last wave by accident & have 2 IP's to show for it. If I had the knowledge, I could have doubled my net worth and be well on the way to financial independence. I am now focussing on further knowledge/education, structuring and getting ready for the next 'wave - boom'. If bargain IP's become available in the mean time I will get them.

 

[see_change]

I think theres a few reasons this strategy isnt as good as it sounds:

How do you know there is going to be a 'boom' before the fact. Just because we've just had a big one doesnt mean there will be another similar one.

Aint hindsight great. Its easy to write this stuff after the fact, not so easy before. Unless your crystal ball is in good order.

The transaction costs and CGT will kill you.

Like everything with these property gurus, It sounds great in theory but wouldnt really be effective in practice.

Actually , IMHO it was quite easy to predict when an area were going to boom in the last cycle and I know several people , including myself and Goanna who discussed this before the facts and did this to good effect in the current cycle and plan to do it in the next cycle.

I don't think it's possible ( or preferable ) to pick the bottom ( and only luck will get you out at the top ) but buying properties at 65K and selling at over a 100 % gain will give you a very nice profit after tax.

See Change

 

[qaz]

You have to be very careful when trying to blindly follow advise from so-called property gurus.

You have to lift the veil and analyse how they have made their money (some did extensive wrapping and flipping), and in a property boom that is a fantastic strategy that creates great returns with little risk.

However, the same strategy, in a flat or decreasing market can be catastrophic.

So, as for many things in life, do your due dilligence with your eyes wide open.

We all have different strategies to accumulate wealth and no one strategy is the "RIGHT" one.

I don't think anyone here is blindly following the advice of a guru and if they are.......STOP! . It's just another perspective and all serious investors should be willing to look at these different perspectives and strategies even if the vast majority of them finish at dead ends.

 

[likewow]

Actually , IMHO it was quite easy to predict when an area were going to boom in the last cycle and I know several people , including myself and Goanna who discussed this before the facts and did this to good effect in the current cycle and plan to do it in the next cycle.

I don't think it's possible ( or preferable ) to pick the bottom ( and only luck will get you out at the top ) but buying properties at 65K and selling at over a 100 % gain will give you a very nice profit after tax.

See Change

I did similar but not by predicting a boom or a wave, just by deciding that 9% yields in particular areas were about as good as it will get and i bought and bought and waited and waited.

Thats a different strategy to buying and selling and buying selling in front of a wave of rising prices.